Regulation in business - working smarter.

Transcription

1 Regulation in business - orking smarter. Submission to the Joint Committee on Economic Regulatory Affairs By The Institute of Certified Public Accountants in Ireland (CPA) May 11th 2010 The Institute of Certified Public Accountants in Ireland

2 Table of Contents Opening statement 01 Context 01 Rationale 01 CPA s key priorities for change 03 Summary and conclusions 04 CPA s 8 key suggestions 05 Proportionate sanctions for non compliance 05 Availability of audit exemptions to small groups 05 Change in VAT registration limits to positively impact business 06 Removal of administration burden from filing process 07 Reform of Bankruptcy Act to encourage an entrepreneurial culture 09 Company la for 21st century Think small first approach 10 Protecting the public interest legal recognition of the term accountant 12 Freeing up of orking capital 13

3 Opening Statement On behalf of the Institute of Certified Public Accountants in Ireland (CPA), I ould like to thank the Chairman, Vice Chairman and Members of the Joint Committee for the opportunity for Eamonn Siggins, Suzanne Sha and myself to meet ith you today. The Institute elcomes the opportunity to present our vies of the regulatory environment in Ireland and ho it can be improved for business. Over the course of the next fe minutes e ill discuss our rationale for change and highlight key areas here smarter regulation can positively impact the SME community. Context The Institute of Certified Public Accountants (CPA) in Ireland is one of the country s leading professional Accountancy Bodies. Established in 1943, the Institute has over 5,000 members and students. 60% of our members ork in business finance, services, manufacturing, & public sector. The balance 40% is engaged in public practice. Our members ork across 5 continents but the majority are here in Ireland. We believe, because of CPAs day-to-day involvement in business particularly medium and smaller businesses e have a valuable and relevant perspective on the effects good and bad of regulation on business. Our submission is based on the first hand experience of our members, ho ork in both financial positions in businesses and in public practice advising businesses. Rationale We believe that proportionate regulation is necessary in Ireland to protect our reputation as a safe environment in hich to conduct business. In the accountancy profession e accept the need for and implement very stringent regulations. A good regulatory frameork is in the interests of our members, their clients, employers, and critically, the public. The High Level Group on Business Regulation has already identified more than 20 million orth of administrative cost savings for business in its first report, through cutting out paperork, revising the rules for small businesses and making better use of online services. We acknoledge this excellent progress hoever there is more to do. Our principal theme is to take account of the impact of regulation on the SME sector and in our submission, e have detailed specific examples of here e can do things better, smarter. Page 01

4 The objective for us all should be to agree a system of regulation that resonates idely and deeply ith all parts of the economic spectrum as all these issues are interdependent. We believe there are areas in hich more regulation is in the public interest, and these are detailed in our submission. Similarly, e believe there are areas here e ould question the need for regulation or the proportionality of existing regulation. Action is clearly needed to reduce the cost burden on Irish business. We recognise too that transparency is an imperative and yet e cannot get subsumed by regulation. We must seek to achieve our objectives in a smarter, cost effective, sustainable ay that creates jobs. The Irish Government s recovery strategy, Building Ireland s Smart Economy A Frameork for Sustainable Economic Reneal, as produced in December 2008 and outlined the programme for medium-term economic recovery based around the concept of the Smart Economy. In March 2010, the Government published Building Ireland s Smart Economy - Progress Report, hich highlighted key headline progress from the ide range of policy actions and developments undertaken as part of the overall recovery strategy. We are in the midst of the deepest economic donturn this country has ever experienced. There is an accepted isdom that this strategy lies at the heart of securing the economy and achieving competitiveness. We have a plan in place and e need to keep going and implement that plan. Smarter regulation is one of the pillars on hich this report is based. In the context of this submission, CPA is not calling for anything radical or ne, e are orking on the assumption that e are pushing a door that is already open. Page 02

5 CPA s key priorities for change: CPA has picked the folloing 8 areas here e believe change ill positively impact the administrative and regulatory burden on Irish SMEs: 1. Proportionate sanctions for non compliance 2. Availability of audit exemption to small groups Currently in Ireland all companies in a group, regardless of their size or the size of the group must have an audit. This is at odds ith the UK, for example, here the individual companies in a group can avail of the audit exemption here the group has turnover less than stg 5.6m and a combined balance sheet total of less than stg 2.5m. This sensible approach frees up the time of the business oner, and allos accountants to concentrate on strategic advice for businesses ithin that group. 3. Change in VAT registration limits to positively impact small business Request for an increase in VAT registration threshold for all goods and services to 120, Removal of administration burden from filing process Fast track of the introduction of extensible business reporting language (XBRL), hich ould allo the electronic filing of all financial data ith government bodies such as CRO and Revenue. 5. Reform of bankruptcy legislation to encourage an entrepreneurial culture Request a revie of current legislation in this area and to introduce similar legislation to the UKs Enterprise Act Company la for the 21st century Think small first approach Draft consolidated companies legislation has been in existence for some time hich ill reform and modernise Irish company la in many areas. We urgently need to progress this legislation as a clear benefit exists for business hich outeighs any cost involved. 7. Protecting the public interest - legal recognition of the term Accountant 8. Freeing up of orking capital A request for an increase in the turnover limit for accounting for VAT on a cash receipts basis to be increased to 3m Time prevents us going in to greater depth on each issue; hoever I ill remind the committee that further background is available on all these issues in CPA s detailed submission. Page 03

6 Summary and conclusion The last 12 months have been challenging for the country, challenging for business. Our members have firsthand experience of businesses in difficulty. It is important to realise that even small changes can make a meaningful difference Our submission sets out specific areas hich must be addressed to ease the current environment in hich SMEs are operating. All of the issues raised can be addressed in the short term. The main goal in the immediate future must be to foster an atmosphere in hich SMEs can flourish. They have been the cornerstone of economic success in Ireland. And if this is to happen again, CPA urges the Joint Committee to adopt these suggestions as a means of supporting their endeavours. Thank you for your attention. Page 04

7 CPA s 8 key suggestions: 1. Proportionate sanctions for non compliance CPA supports the principle of comply or pay and recognises the improvement in compliance rates in Ireland since tough sanctions ere introduced in relation to late filing of annual returns to the CRO. We ould suggest hoever that one particular sanction requires reexamination in that it is disproportionate to the offence and serves little public good. Issue: If an audit-exempt company is late ith filing an annual return to the CRO, they are fined ( 100 becomes due immediately and a daily penalty of 3 accruing thereafter up to a maximum penalty of 1,200). In addition, the company loses their audit exemption for that year and the folloing year. Consequence: The cost in terms of money, time and effort to a business is significant. Failure to file on time results in a disproportionate penalty, being both a fine and removal of the audit exemption for to years. The cost to business is significant particularly the cost of engaging in an audit process both in financial terms and in loss of time by the oner/manager. Solution: Whilst CPA is aare of the importance of regulation and regular filing, CPA finds this particular penalty too severe. Acknoledging that it is important to keep submission levels high, CPA recommends that a compromise of an increased monetary penalty be imposed and the loss of audit exemption be removed. 2. Availability of the audit exemption to small groups Issue: Under the Irish Companies Acts the individual companies in a group structure, regardless of their size cannot currently avail of the audit exemption. This requirement is at odds ith the UK requirement here individual companies in a small group structure can avail of the audit exemption. In the UK, this applies in cases here the turnover for the hole group is not more than stg 5.6million and groups combined balance sheet is not more than stg 2.8million. This sensible approach frees up the time of the business of the business oner, and allos accountants to concentrate on strategic advice for businesses ithin that group. Consequence: Each company ithin the group is subject to an annual audit at considerable cost to a company. In complying ith auditing standards, perhaps designed for larger companies, a considerable amount of time is spent by the oner /manager and the auditor complying ith auditing standards perhaps meant for larger companies, time that could otherise be spent on strategic planning. Suggested Solution: Company la should be amended so that Individual companies in small groups should be able to avail of the audit exemption threshold. Page 05

8 3. Change in VAT Registration Limits Issue: The current VAT registration limits are 37,500 for the supply of services and 75,000 for the supply of goods. VAT registration limits for business are too lo resulting in a disproportionate administration and cost burden. Consequence: An administrative burden is placed on small business/ start ups to comply ith VAT registration at lo levels of turnover. As the amount of revenue generated from the lo levels of registrations is likely to be very small, the purpose cannot be one of revenue generation. Suggested solution: As this involves a disproportionate cost for small business, CPA suggests raising the limits for all business particularly for the supply of services. CPA suggests a VAT registration limit of 120,000 for all goods and services. Page 06

9 4. Remove administration burden from online filing - Agencies need to ork together Issue: CPA does acknoledge that there have been considerable improvements in recent years ith regard to electronic filing. The Revenue online service has been a very efficient and elcome development and should be used as a model for online service delivery across other related agencies. There have been developments too at the CRO. Data can no be sent online but accounts still have to be submitted by post. The administrative burden on businesses in fulfilling their reporting requirements remains considerable. As the Smart Economy lies at the heart of our national development plan, e should be orking as smartly as possible to reduce the cost and time burden on business. Revenue, CSO and CRO need to ork closely together and have access to centrally filed information, instead of each agency separately asking a business for the same information. Consequence: Time and money cost to business. Suggested solution: Key agencies Revenue, CSO and CRO - need to ork together Paper needs to be removed from the filing process. One practical solution ould be to fast track the introduction of XBRL i-iii (extensible business reporting language), hich is becoming a standard means of communicating financial information beteen businesses. It offers cost savings, greater efficiencies and improved accuracy to all those involved in supplying or using financial data. i ii iii. XBRL (short for extensible Business Reporting Language) is a computer readable format for financial data. It orks by putting a tag on each piece of electronic data (text or numbers) ithin a document. Inline XBRL makes XBRL readable by humans. It guarantees that the layout and presentation of information looks the same for both the author and the person receiving it, hether it is being vieed online or as a printout. XBRL provides major benefits in the preparation, analysis, re-presentation and communication of business information. It also offers cost savings through greater efficiency, improved accuracy and reliability to all those involved in supplying or using financial data long term these are expected to far outeigh any initial development/set up costs. It is based on XML (EXtensible Markup Language) hich is, in computing terms, a mature standard, and a proven technology that has been in use for many years Page 07

10 A revie by the Department of Enterprise Trade and Innovation endorsed the early adoption of electronic filing along ith XBRL financial statements and has called for Companies Registration Office (CRO) and Revenue Commissioners to ork closely together and to engage ith accountancy bodies to produce a cross-agency result hich can be replicated by other Government agencies through their existing customer service mechanisms. In order to quickly reduce administrative burden on business, CPA suggests that Government establish a timetable for the introduction of XBRL. This ould be an important step toards offering a joint filing facility for company accounts and Company Tax Returns and ould reassure businesses that Revenue, CSO and CRO are orking closely together to align their services to make the filing of accounts and other financial data as easy as possible for Irish companies. It is vital that company Directors should only be required to submit information once to the authorities, and thereafter the various arms of authorities should have access to such information in a central source. Studies have already shon that here manual ork is removed from the process there can be an immediate impact on the bottom line. For example Deloitte has recently reported a reduction in their tax preparation time by 25-30% by incorporating XBRL and orkflo management ithin the Deloitte taxation practice. For comparison, in the UK Companies House has announced that it ill accept company accounts in XBRL format. This is the same format in hich all Company Tax Returns (CTRs) including the return form, company accounts and tax computations must be submitted online to HMRC from April A side but related issue, access to adequate broadband connections still continues to be an issue for Irish business and needs to be tackled. Nextgeneration access netorks have the potential to drive economic recovery by enhancing the development of Ireland s smart economy. Hoever it is idely acknoledged that this ill take a significant investment. We do need to take ambitious steps and state investment ould seem to be the only feasible ay forard. The recent TIF report has been very eloquent on this issue and CPA supports the policy suggestions made therein. Page 08

11 5. Reform of the Bankruptcy Act to encourage an entrepreneurial risk-taking culture Issue: In Ireland there is still a stigma attached to business failure. This principle is enshrined in la, hich dates back to the 1800s. The Bankruptcy Act 1988 is not designed for an entrepreneurial, risk-taking environment in the modern economy and is in need of reform. Consequence: The process of bankruptcy in Ireland is very much out of date in comparison ith our European partners, in particular the UK and as such the range of bankruptcy alternatives is both limited and unieldy. In the current donturn, both companies and individuals are experiencing unprecedented levels of debt. Ireland cannot have a successful economy unless it has courageous, genuine entrepreneurs ho operate in a culture here a level of risk is accepted and failure tolerated. Without risk there can be no reards. Suggested solution: Current outdated legislation that prevents an individual adjudged a bankrupt from acting as a director or taking part in the formation or management of an Irish registered company for a period of up to 12 years needs to be abolished and ne legislation enacted to remove the fear factor associated ith Irish start-ups. Under UK legislation, The Enterprise Act 2002, an individual may be discharged from bankruptcy after just one year or restrictions could last from beteen 2 to 15 years depending on circumstances. CPA recommends that Government revie the Bankruptcy Act 1988 as a matter of urgency and introduce a similar proportionality to bankruptcy restrictions in Ireland. CPA also recommends that legislation be enacted in line ith the present Individual Voluntary Arrangement (IVA) scheme in the UK to deal ith personal debt management hich ill in turn facilitate and promote entrepreneurship. Page 09

12 6. Company La for the 21st century Think small first approach Issue: This issue concerns simplification of company la. There are currently 13 Company Acts as ell as Statutory Instruments dating back to In July 2008, the Company La Revie Group (CLRG) prepared the General Scheme of the Companies Consolidation and Reform Bill, hich consolidated existing legislation into one and included a number of proposed improvements. The Government accepted the CLRG s proposals and this is currently ith the Parliamentary Draftsmen s Office to be reritten as a Bill. To date this has not happened. Consequence: What the CLRG has proposed represents a sea change in company la legislation as it tilts the balance firmly toards the interests of the tens of thousands of small private companies. Previously, company la legislation as firmly based on the requirements of public companies but under the ne proposals the private company ill take centre stage. This is effectively a think small first approach, hich ould greatly benefit SME Directors in particular in alloing them to understand and comply ith their company la requirements. From a better regulation point of vie, in addition to the consolidation of existing legislation, the Bill ill contain a number of reforms, hich ill make the incorporation and operations of companies easier. Some key elements of these reforms are summarised as follos: The company ill have a one-document constitution, replacing the current to documents i.e. the memorandum and articles of association. The company ill not be required to have an objects clause in its constitution i.e. a statement enabling it to undertake only specified types of activities. This ill simplify the process of incorporation and operation of the company The company may have just one director (current minimum is to) and a company secretary. The company secretary and the sole director cannot be the same person. It may have just one member (usually meaning shareholder). Its members can aive the requirement to hold an Annual General Meeting (but if 10% of the membership subsequently requests an Annual General Meeting or an Extraordinary General Meeting, it must be held). The Bill ill also reduce the involvement of the Courts in the company inding-up process so as to minimise the burden and cost on creditors and shareholders. The company ill be eligible for audit exemption up to the ne EU thresholds. Page 10

13 A simplification and grading process ill be introduced hich ill grade criminal offences in accordance ith severity of sanction. This ill simplify the mandatory obligation on auditors to determine hether a suspicion that a particular offence ill or ill not be reportable to the Director of Corporate Enforcement because the obligation to report ill be confined to, say, category 1 and category 2 offences and each individual offence ill be labelled. Suggested solution: Draft legislation is in existence for some time. As e believe business benefits exist in the exploitation of this legislation, CPA suggests that some resources be applied to free up the drafting log jam and that the Office of the Parliamentary Counsel to the Government be tasked ith drafting legislation hich can siftly progress to Bill stage. Page 11

14 7. Protecting the public interest - legal recognition of the term Accountant Issue: The designation Accountant may be used by any person in business, and is not reserved for use by holders of a professional accountancy qualification Consequence: The Accountancy Profession is among the most highly regulated in the business orld. Despite this level of regulation it is possible for any person to present themselves to the public as an accountant, and operate outside all regulations. This poses a risk for the public and dilutes the effectiveness of the regulation of the profession. We are not suggesting that an individual or business is not free to take advice from any person or persons they choose, but if they do take advice from someone they believe to be an accountant, then they should be able to rely on that person being competent, educated, ethical and regulated. Protection of the term accountant ould, at a minimum enable the public to distinguish beteen those ho are qualified to give financial advice and subject to regulation as opposed to those ho are neither qualified nor regulated. At difficult times, it is all too easy for businesses to seek to cut costs in vital areas such as professional advice. The consequences of this are potentially catastrophic. Businesses hich fail to comply ith the tax codes, company la and best practice in terms of operations and corporate governance are those most likely to fail. Businesses have a right to kno that the accountant advising them is properly qualified and regulated by a competent professional body. Suggested solution - In April 2007, Irish Auditing & Accounting Supervisory Authority (IAASA) recommended to the Minister for Trade & Commerce, Michael Ahern TD, that use of the description Accountant should be restricted to members of the prescribed accountancy bodies, ho are subject to a range of significant regulatory and monitoring measures. IAASA also recommended that those ho are not members of the existing prescribed bodies could be entitled to use the term accountant if they submit themselves to the regulation of a competent authority. The CLRG also examined the Authority s recommendations regarding statutory recognition of the term accountant. Having considered that matter, a majority of the CLRG s membership accepted the consumer protection issue identified by the Authority; and endorsed the Authority s analysis in favour of affording the term accountant statutory recognition. Folloing such considered recommendations, CPA suggests that legislation be introduced quickly and rigorously enforced. Page 12

15 8. Freeing up of orking capital Issue: Cash flo management has never been more critical for Irish business. One ay in hich small business can maximise their cash-flo position is from a VAT perspective. Businesses accounting for VAT on an invoice basis, provided they meet Revenue turnover requirements - should apply to Revenue to convert to accounting on a cash receipts basis. Returning VAT on a cash receipts basis means the business does not pay the VAT on their sales until the invoice has been paid unlike the invoice basis hereby VAT has to be paid on the basis of invoices actually issued irrespective of hether those invoices have been paid or not. Consequence: 88% of CPA members polled recently are seeing viable businesses getting into trading difficulties because of the lack of credit available from our financial institutions. In the current climate companies need to reserve cash to fund the day to day operations of the business. Late payment is a serious issue, particularly no that the financial crisis has put paid to many of the cash flo options that ere previously available to small businesses. Recent surveys suggest the average payment period is no 69 days ith 32% of small businesses experiencing delays of 90 days. With a relatively minor change in the tax code, Revenue can help businesses to survive and recover. Suggested solution: The turnover limit for accounting for VAT on the cash receipts basis is currently 1,000,000 per annum. It is possible that businesses ith decreasing turnover may no qualify to operate on this basis here they had not before. Clearly there is a significant cash-flo advantage in being obliged to account for VAT only hen payment is received. CPA believes it is time for Revenue to broaden the conditions and bring more companies into the cash receipts basis net. We suggest that Government increase the threshold for VAT on a cash receipts basis from 1million to 3 million to relieve pressure on orking capital. This ill not negatively impact the exchequer as VAT is still collected. Over 90% of businesses in Ireland are either micro, small or medium enterprises. These companies ill be critical to our economic recovery and deserve to be supported. Page 13

16 Dublin Office The Institute of Certified Public Accountants in Ireland Belfast Office The Institute of Certified Public Accountants in Ireland 17 Harcourt Street, Dublin 2, Ireland Phone Fax Wellington Park, Malone Road, Belfast, BT9 6DJ Phone Fax Web.cpaireland.ie Web.cpaireland.ie